Economists warn of Trump currency war
Economists predict that if the Chinese yuan weakens further it could heighten the Sino-american conflict
A currency war will be inevitable if the US raises tariffs to 25 per cent on Chinese goods, economists fear. The tariffs will open up currencies as a second front between the world’s biggest economies, risking a 15 per cent depreciation in the Chinese yuan, according to an analysis from TS Lombard. This is expected to provoke Donald Trump, after the US president issued stinging criticism of Russia and China when its currencies lost value against the dollar in April.
A CURRENCY war will be inevitable if the US ratchets up tariffs to 25pc on $200bn (£157bn) of Chinese goods this September, economists fear.
The tariffs will open up currencies as a second front between the world’s biggest economies, risking a 15pc depreciation in the Chinese yuan, according to an analysis from TS Lombard.
This is expected to provoke US president Donald Trump, after he issued stinging criticism of Russia and China when its currencies lost value against the dollar in April.
Mr Trump said in a tweet: “Russia and China are playing the currency devaluation game as the US keeps raising interest rates. Not acceptable!”
Low-level talks between the two powers are due to take place in Washington later this month, amid little hope of a breakthrough.
The Chinese yuan has seen a fall of 9pc against the US dollar since April. A further fall will add to the forces driving up the greenback, making America a less competitive exporter, and potentially worsening its trade deficit.
As a result, fears are mounting that if the Chinese yuan weakens further it could trigger an escalation in the Sinoamerican economic conflict.
Among scenarios being considered are a US intervention in currency markets. Such a step was considered inconceivable earlier this year, given the potential damage to global markets. However, it is now being mapped out by the City.
Viraj Patel of ING Economics said: “We’re now being asked if Donald Trump would think of intervening in the FX market [should he interpret a devaluation of the yuan as deliberate]. That’s not even a question we would have considered six months ago. Given this new mercantilist world that we’re living in, it’s conceivable now.”
“[If relations worsen] we’ll get threats of dollar intervention rather than further tariffs,” Mr Patel added.
The Daily Telegraph understands that China’s central bank is not in favour of allowing a sudden currency depreciation, and would move to moderate it in order to mitigate the risk of capital flight. However, there is now an acceptance that US actions could render significant weakening of the yuan inevitable. Mr Trump issued support for a strong dollar yesterday, saying that “money is pouring into our cherished dollar like rarely before”.
However, a more expensive dollar is a counter to his trade policy aims.
Mr Patel said: “The chief aim of the Trump regime’s trade strategy, to narrow its trade deficit, has become increasingly difficult. The strong dollar and narrowing the current account deficit are incompatible, they cannot marry.”
The dollar has risen in value against a range of currencies, thanks to a drop in confidence in emerging markets following the onset of the Turkish lira crisis. This led investors towards so-called safe haven assets such as US treasuries.
The Federal Reserve’s plan to continue its course of rate hikes in order to cool a hot US economy will serve to further reinforce the dollar’s strength.
Bo Zhuang, of TS Lombard, said: “A decision by Trump to double down on his tariff tactics would have adverse effects on inflation and global markets.”
If China’s currency does fall further, as City analysts expect, it would add to downward forces acting on other Asian currencies.
He added that emerging markets would be “collateral” in a Us-china currency war.
Currencies most at risk include India’s, which burst through the psychologically significant level of 70 rupees to a dollar this week, the Indonesian rupiah and the South African rand.